12 Dec 2022

Transcript: APPEA Chief Executive Samantha McCulloch discusses gas market pricing with Tom Oriti on ABC News Radio Breakfast

12 December 2022

Interview with Tom Oriti on ABC News Radio Breakfast

Tom Oriti: Samantha McCulloch is the Chief Executive of the Australian Petroleum Production and Exploration Association. And Samantha joins us on the line now. Good morning, thank you for your time.  

Samantha McCulloch: Good morning Tom, thanks for having me. 

Oriti: In terms of your concerns here, Samantha, you’re saying the government’s intervention is more extensive than initially announced. What do you mean by that? 

McCulloch: Indeed, it is far more extensive than we are anticipating. Not only has the government announced a price cap of $12/GJ for a minimum one-year period, there is ongoing regulation proposed in the gas market. This is price regulation that really dismantles the open and competitive operation of the Australian gas market. This is of particular concern to the industry and, frankly, it’s sending the wrong signal to future investment. 

Oriti: I wanted to ask you about that in a moment. But you say that the proposals undo 20 years of gas market and broader energy market reform. Critics of the industry, though, say you price gouge; some even go as far as saying you’re taking advantage of world events like the war in Ukraine to make vast profits at the expense of households. There are a lot of people doing it tough at the moment. What would you say to that sort of criticism? 

McCulloch: What we need to be very clear on is the domestic gas market… Firstly, the prices being realised in the domestic gas market are not the same as those being realised in the international spot market.  

The average price that we’re seeing the domestic market in terms of long-term agreements – this is in the wholesale market – is around $12/GJ currently. Now, this reflects tightening supply in some ways and this volatility that we see in terms of demand for gas.  

So, the solution to actually bringing down the prices for the domestic market is investing in new supply and ensuring there is adequate supply there, particularly to service the power market as we are looking to phase out coal and as we’re looking to increase the share of renewables. That’s where gas is in demand… 

Oriti: Are you saying then that those caps – sorry to interrupt – will harm the likelihood of those companies to investment in Australia? Because the Prime Minister doesn’t think that it will. 

McCulloch: Absolutely it will. These price caps send a signal that the government change the rules of the game at any moment. And what we are actually seeing is that after the industry has invested over $400 billion in the Australian economy in the last decade, the rules of the game are constantly changing.  

Just in September, the east coast gas LNG producers struck a deal with the Australian Government to ensure that supply would be offered to the market at reasonable and competitive rates.  

But within three weeks of that agreement being struck, the government was calling for further intervention.

And now, the latest intervention are these price caps and then ongoing regulation of price in the market, which fundamentally dismantles what was an open and competitive market, will chill investment, and actually make the problem worse, because we won’t have that new supply coming online when we need it.  

So ultimately, this is going to hurt Australian manufacturers, this is going to hurt Australian households, we’re going to see higher prices in the long term. 

Oriti: Because you know the prices are… if you look back at the Federal Budget in October forecast to rise by a painful 56% over two years, and the government says this intervention will curb that somewhat down to 47.6% – so that $230 reduction to the average household – but… so that’s what the government says is going to be happening now, it is going to reduce the pressure. 

I don’t know if the average person listening who wants their power bills to go down are really focusing too much on investment in the Australian gas industry. If you don’t like the plan… if you don’t like the plan and something has to be done, what would you suggest as an alternative? 

McCulloch: Well, let me just make a point on the power prices. On the east coast market, gas energy supplies around 7% of electricity generation, and it’s actually coal and hydro that set the price of power the vast majority of the time – almost 80% of the time.

So, these interventions in the wholesale gas market – not the retail gas market, the wholesale market – are not what’s going to deliver those price reductions in the power market. What it is going to do is lead to less investment, less supply in the future – that’s actually going to drive up costs, including for industrial consumers.

Oriti: So, what would you… when I ask the question of what you suggest as an alternative it sounds like you’re saying… I don’t want to put words in your mouth, but you don’t want to be put in the same basket as the coal industry. 

McCulloch: Well, what we want to do is let the market work to bring on new supply. That is the key to bringing down prices and yet let the existing market and the mechanisms that are in place, give them a chance to work.

Oriti: But some people would say they’re absolutely not working.

McCulloch: The industry struck an agreement with the federal government in September – at the end of September – that was backed up by a voluntary code of conduct that governs how gas is offered to the market, improves transparency, and also included a dispute resolution process.

This was a code that was negotiated over two years with industrial gas users, with the federal government, and yet again, within less than three weeks the government was calling for further interventions.

Now we were already seeing signs that the market was working, and that these agreements were working – we saw a large number of gas supply agreements being struck in the last few weeks. That included an 11-year supply agreement between Santos and Brickworks that was struck at competitive terms that both parties are comfortable with.

So, this is what we need to be seeing, we need to be seeing the market working, giving the existing heads of agreement, the code of conduct… giving them a chance to work before introducing more intervention. 

What we need here is more supply, not more regulation. 

Oriti: Well, with all of the issues we’ve discussed… I do know consultation on this draft will close in, three days isn’t it…?

McCulloch: Tomorrow, tomorrow.

Oriti: It’s 15th of December, though, isn’t it? 

McCulloch: No, I think the submissions are due tomorrow. My understanding is a two-day consultation period…

Oriti: Either way, soon, soon is the point…

McCulloch: Either way – the magnitude of the reform that’s being proposed, and again, this is not just a temporary emergency measure around the price cap, it’s ongoing regulation of the gas market that fundamentally dismantles what was an open and competitive market. 

To have a two-day window of consultation on these reforms is frankly not meaningful, it’s not genuine, and it’s obviously insufficient to really assess the long-term consequences of this reform.

Oriti: And Samantha, you want to meet with the Prime Minister, you’re seeking an urgent meeting with Anthony Albanese… this first question, have you heard back from his office?

McCulloch: We haven’t heard back from the office yet, but we think it’s really important that the Prime Minister sits down with the industry and understands the consequences of this reform and what it will do for investment plans. I’m already hearing from my members, they are deeply concerned for what this means for investment in Australia going forward.

Oriti: Ok, I appreciate your time, thank you very much. 

McCulloch: Thanks, Tom.